How to Save the Individual Insurance Market Post-ACA

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Just 6% of people under age 65 buy health insurance on the individual market (rather than getting it through their jobs), but the political debate about how to arrange insurance for them is causing great turmoil and has revived discussion of the individual mandate.

Most of us would like to see reasonably decent insurance at reasonably affordable premiums made available to the high-risk portion of the population (perhaps 20% of the 6%). The current version of the ACA, the one that is targeted for repeal and replace, tried to accomplish this with cross-subsidies. That means overcharging lower risk people so insurance companies can hold down premium for those at high risk.

My research has found that the group being overcharged the most under the ACA was not younger people but older women in their 60s.

The problem is, how do we induce the lower risks to overpay for their insurance? The ACA used the so-called individual mandate, which imposes fairly mild penalties to discourage them from staying out of the market and remaining uninsured.

Three years after the mandate went into effect, evidence suggests that the penalties were not enough to overcome resistance. The market attracted a fairly large proportion of younger people, but those who expected to have low medical expenses were priced out.

My research has found that the group being overcharged the most under the ACA was not younger people but older women in their 60s. They had to pay a high premium based on their age (three times that of those younger), and it was boosted substantially by much higher use of care by older men with chronic conditions caused by poor health habits.

The result of this and other kinds of mispricing is that the number of uninsured still remains stubbornly high, much higher than the number projected by the Congressional Budget Office and industry groups. And yet there remains fierce political opposition to the individual mandate, opposition that probably will help to bring down the ACA program. The proverbial half a loaf in this case may have been worse than none.

There is a potentially better alternative. First, raise the money to help high-risk people through taxes spread fairly over the whole population. This is fairer than loading the full cost onto the few young people and older women who use the individual market.

This can be accomplished in the short run with tax-funded high-risk pools for sicker people. In the long run, it can be accomplished by requiring insurance companies to sell insurance to high-risk people at reasonable premiums, as long as they have consistently maintained coverage over time.

Second, require insurance companies to dramatically lower the premiums charged for individual insurance, since those at high-risk would no longer be included in the risk pool. This will make insurance an attractive financial deal for those with low and average risks (80-85% of the relevant population).

Third, enact an individual mandate to mop up the few potential buyers who cannot tell a good deal when they see one.

And fourth, set the penalty for failing to buy insurance equal to the premium for a catastrophic but reasonable policy, and let the government use the fine to buy coverage for those who don’t do so themselves.

This approach gives us many of the benefits we have long sought, yet avoids heavy-handed regulation. It gives us universal insurance coverage, the possibility of choosing multiple options for that coverage, and the humane benefit of covering people at all levels of risk, from high to low.

This is not a complete solution, because it does not help low-income individuals for whom even a reasonable premium may be unaffordable. They will require subsidies to be able to purchase insurance, and taxpayers will have to agree to pay higher taxes to cover them.

But at least one of the major sticking points in bipartisan agreement on health reform—how to deal with high risks—can be taken off the table.